Are student loans broken? What I told Uni Minister Jo Johnson

If you read the papers you’d think the answer is a clear cut yes. I too agree, to an extent. Yet the most commonly quoted problems tend not to be what worries me most, and the things least mentioned can hurt.

On Tuesday, MSE organised an event at the Tory party conference, where I debated this subject with University Minister Jo Johnson, chaired by Nick Hillman, Director, Higher Education Policy Institute.

This was an important debate, so I thought, as we weren’t allowed to broadcast it, it’s worth noting down for posterity my opening remarks (it’s up to the minister if he chooses to publish his). Below is a transcript (edited to make it a bit easier to read and with added sections), though I speak freehand and sometimes with venom, so it’s not the easiest transcript to scan as it misses that tone.

I think as somebody who has called the Government liars, backtracking, sold out a generation of students on behalf of freezing the threshold, hired lawyers to investigate trying to overturn it you could say I’m a little bit pleased at the U-turn this week.

So, yeah, absolutely the right move, important to say that I am not opposed to cutting interest rates at all. I just think if you’ve got a block of money the first place to put it is in increasing the repayment threshold. Cutting interest rates, increasing maintenance loans are very important too. But if you’ve got one block of money, start with increasing the threshold, that retrospective change was bad, but I’ll come on to that formally in a second.

First, I’d like to frame exactly what I’m going to talk about today.

Today’s debate is about how we reshape the current system

Clearly, the landscape in student finance has changed, the Labour Party are talking about no tuition fees, so they are saying the cost of their education should be met through general taxation – a perfectly valid and honest theory and philosophy.

But we are here at the Conservative Party Conference and rather than going through that bigger debate, which frankly is not going to wash with the Minister. So I want to be practical, if we accept that the individual is going to have to contribute to the cost of their higher education, is the structure of the way we do that right now correct or not? And that is what I am going to be talking about, but don’t take that as a reading that I discount the Labour view.

Marketisation – fail

The idea that each university is going to be able to charge different fees, that gives the individual a choice of how much they want to pay for their education, has been a robust and absolute unmitigated failure.

Almost every institution charges the same amount. It hasn’t worked, it should be scrapped. And it is rather ironic that one of the prime reasons it is a failure, is because it should have been a failure.

The way we have set up the repayment of student finance which says you repay 9% of everything above a threshold, currently £21,000 (but going up to £25,000) for 30 years before it wipes means for the vast majority of graduates higher tuition fees won’t cost them much more.

Only higher earning graduates would repay more on a £9,000 course than a £6,000 course (the original range) once you incorporate the maintenance loan. So, my advice from day one to students was to choose the right course and ignore the tuition fees, because you will only have to repay more if you earn a shed load of money once you leave – in which case chose the right course to hope that happens.

So it would be counter logical for marketisation to have worked in any way. So I think we really need think about how that one is affected and I think part of the problem of that I am going to come onto later is the naming of the way that we do the system. Now let’s move on to that retrospective change.

Retrospective Change: Lack of faith isn’t fixed by a U-turn

Note this refers to the Governements freezing of the student loan repayment threshold at £21,000. It was supposed to go up with average earnings from 2017.

This was disastrous, and the fact there has been a u-turn hasn’t stopped the disaster. The disaster is very plain.

When a student and their parents, grandparents make the decision to go to university they are weighing in many factors. We hope they are looking at the finance. It is over a very long period. And what they want to know is what I am signing up to is what I will get.

In the past we had never seen a substantial retrospective change to the terms and conditions of going to university. We got it for 2012 starters. The breach of the very loud promise made by David Willets – and I have letters written by David Willets to parents that say from 2017 the threshold will go up, with no caveats, no mention of terms and conditions.

There is no commercial company who has a loan based system who would have been allowed to make that change, even though it wasn’t in the small print when the FCA regulates loans. It says your core marketing terms must be honoured even if they’re not in the small print, same with mortgages, go check it out – we’ve had this before. They would not have been allowed to do that. The Government have done it.

That breach of promise does two things. First of all, it has knocked the faith of students in the student loan system we have. How can you trust it when there was a change to the terms? “I signed a contract and you have unilaterally changed the terms – that was wrong.”

The second thing, it has knocked the faith of students in the entire political system because the political classes, and lets be straight as we are sitting here, the conservative political classes, primarily, lied to them and misled them. And while the u-turn is welcome in practical terms, the shaking in the faith has not been fixed.

As someone who put myself out there because I believe my own political view should be secondary to making sure there isn’t one young person in this country who is put off going to university for the wrong financial reasons. The biggest questions I get is what if they change the rules. And that retrospective hike has knocked that forever and that hasn’t fixed it.

We have to ensure that every student knows what the terms and conditions are when they start and there wouldn’t be any retrospective changes. This is crucially important and should be locked into statute or at the very least if we are going to have variable rates and conditions within the student loan that need to be overtly declared and transparent.

For example you could say, “We will never change the 30 year limit. That is locked into statute. We may change your interest rate. We may change your repayment threshold.” Not in the small print. If we are going to have to explain it, let’s be upfront.

One of the misunderstandings out there this year is that the Government has increased the interest rate. No, the interest rate is unchanged, the rate of inflation changed, and the interest rate is based on the rate of inflation. I’ve been out there defending on that, because it is unfair to accuse the Government of changing interest rates.

You can have terms that are changeable but you must declare them and be open and transparent about them. That has been breached and as always when you breach a rule, putting it right a year and a half later doesn’t put you back to where you were. Faith has gone.

It is no longer true that there’s no need to pay upfront to go to university

I will be publishing a further blog on this next week

This isn’t about tuition fees. This is about the most import and biggest practical problem that students face at university. Affording to live.

[Pause for a cheer, including from the President of the National Union of Students]

Quite simply, we have increased the means testing. We have mislead parents. On my roadshows, parents come up to me and say my kids are given £5,000 and their hall fees are £6,000 why don’t they get more? And I say to them, how much do you earn and they tell me £50,000 and I say you do realise that the full loan they would have got is, let’s say £9,000 and there is a parental contribution of £4,000 and they say, no.

There is an official parental contribution on the maintenance loan. I wrote to the Minister, he will remember it, asking that in the loan letter, instead of telling parents “your child’s loan is £5,000”, it is changed to say “the full loan for your child is £9,000 because of means testing your child will only receive £5,000 therefore, there is a parental contribution of £4,000 to be had”. Though I would accept “there is an extra £4,000 gap that you need to make up”. That level of transparency is crucial.

It isn’t that the loan isn’t big enough for those parents, it’s that they have been means tested and don’t get the full loan but we hide it and it is somewhere like page 32 in the small print of the student loan literature. It is absolutely unfair and what we are doing now is knocking the faith of people in this system and meaning students cannot afford to go to university because the truth is your parents will need to give you money, they will need to save up and if you’ve got two kids at university which over 60% of parents have two kids within a 4 year gap.

Two kids at university at the same time, even though you are having to contribute £5,000 to your first kid they only reduce the residual income by £1,130 in other words, if you’ve got triplets you’re really screwed because it’s not taken into account. So, what we have here is a real practical problem for middle class parents. Lower income parents get the full loan.

Middle class parents struggling to find the money to send their kids to university and their children don’t have the cash, nobody tells them about this and their children have no way of forcing them to give them the money. The biggest problem with student loans if we keep the current system is that the loans aren’t big enough, not that they are too big.

The language of debt is psychologically damaging – it should not be called a debt

For over 20 years we have educated our youth into what we call a debt and we have never educated them about debt properly. Even though financial education is now on the national curriculum – I campaigned for it – it is a pyrrhic victory, we’ve not put any resources into it. But secondly what we’ve done is we’ve inured an entire generation into borrowing, because if we say you’ve got to get a debt to go to university then they go on and get their credit cards and their payday loans, it has been tremendously damaging.

The language of debt is misleading. I can’t explain the system, because everyone says, I am going to have this debt hanging over me that I am going to have to repay. No, this is a contribution system in proportion to your financial success after university. By calling it a debt it makes it more difficult to explain. That is why people call to have the interest rate cut rather than raising the repayment threshold. They don’t understand it. If you change the name it will be closer.

So my big ask, if you want to fix this, you are going to stick with this system then get rid of the name of debt. Get rid of the word interest, call it an uprating. This in every other country is called a graduate contribution system. That’s effectively a graduate tax, but technically you can’t call it that because you can’t hypothecate it and you can’t tax people abroad.

Wrapping up (at speed due to time constraint on speakers)

The system is a graduate contribution system and should be called so, but don’t do that in isolation. Give people a guarantee of what can change and what can’t change.

You want to make changes, fair enough. That’s politician’s remit, but be really up front for example – it will be wiped after 30 years, the interest will be related to inflation but we might change it exactly the proportion it relates to inflation. You will repay 9% above the set threshold but we may change the threshold.

Call it a contribution system, lock it in, give people respect so they know exactly what they’ll sign up to. People might understand it better, might respect it better and might start to understand your argument a little bit better about it being shared between the individual and the tax payer. Right now the system is broken cos it aint a loan, and we call it one.

If you managed to read through all of this, well done, its not easy in the transcript form. After that, then as well as the Ministers statement there was 40 minutes of often robust Q&A and debate, hopefully it did some good.

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